The bullish case for Apple Inc. AAPL was based expectations for weak iPhone growth to be more than compensated by a jump in iPhone average selling prices. But that story has now passed and the stock is entering a "period of digestion."
Guggenheim Partners' Robert Cihra downgraded Apple from Buy to Neutral with no assigned price target (prior price target of $245).
Apple recorded its best ever iPhone revenue growth in three years in fiscal 2018, but that was in some part due to a "big jump" in iPhone ASP of 17 percent, Cihra said in a note. While favorable at the time, the bullish story of "growth via ASPs" will start to anniversary. Over the past decade, Apple's iPhone ASP is up 40 percent, or $220 per unit -- with half of the growth occurring in fiscal 2018.
Investors may be right in pointing out the $1,099+ new iPhone XS Max will help lift ASP but replacement cycles have already expanded from two years to three years, the analyst said. As such, investors may have to wait until 2020 for Apple's next "genuine" upgrade cycle to start in conjunction with the launch of 5G.
Despite strong growth in the Services business Apple's reputation of being a "product company" remains unchanged. Specifically, when Apple launched the iPhone Upgrade Program three years ago, it should have evolved into selling Apple's entire product and services portfolio to loyal users but this change hasn't been implemented yet.
Apple's large size implies it likely needs to enter even bigger markets to support strong growth. Cihra said "we remain convinced" Apple is developing an electric and self-driving car which contributed to total R&D dollars tripling over the past five years and more than doubling as a percentage of revenue from 2.6 percent in fiscal 2013 to 5.4 percent in fiscal 2018.
Shares of Apple closed Tuesday at $192.23.
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